Impact of FDI on performance of Banks in India
[Link]
Abstract
Foreign Direct Investment is considered as the elixir of economic development
particularly for developing economies like India. For developing economies like India
FDI acts not only as a source of capital but also enhances competitiveness of the
economy through technological up gradation , improving infrastructure, increasing
productivity and generating employment. Banking sector as key economic sector plays an
important role in the economic development of any country. After the economic reforms
in 1991, the banking sector has developed a lot. Today, Indian Banks have
technologically improved to international standards providing advanced facilities like
Internet Banking, M-Banking, ATMs etc, to its customers. This paper aims at highlighting
the impact of FDI on performance of banks in India. This study shows that FDI has
impact on Total Business, Business per Employee (BPE) and Total Income of the banks.
However, FDI has negative impact on Profit per Employee (PPE) and Total Net Profits of
the selected banks.
Key Words: FDI, banking sector, productivity, profitability, multi linear regression.
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Introduction:
Foreign Direct Investment is considered as the elixir of economic development
particularly for developing economies like India. For developing economies like India FDI acts
not only as a source of capital but also enhances competitiveness of the economy through
technological up gradation, improving infrastructure, increasing productivity and generating
employment(Kumar&Gupta,2012).FDI is considered as an driving force of economic
development and transfer of technology. Greenfield investment and mergers & acquisition are
the two ways in which FDI occurs in India(Ramakrishna,2011).Moreover, FDI plays an
important role in the economy of the country as it not only provide opportunities for economic
development but also opens new avenues to optimize the earnings through prudent employment
of available resources.
International Monetary Fund (IMF) defines FDI as the investments that are made
to earn a lasting interest in an enterprise operating in an economy other than that of the investor.
The purpose f the investor is to have a voice in the management of the enterprise (as cited in
Organization for Economic Cooperation and Development[OECD],2008).In a developing
country like India, FDI is considered as a tool for economic development, which aids the
economy in achieving self-reliance in all the sectors of the economy.
As a country having rich and diversified resources, sound economic policy, good
market condition and highly skilled man power, India is indeed a good destination for investment
(Sharma&Singh, 2013).According to the World Investment Report 2014 released by the
UNCTAD (2014), Despite of macroeconomic uncertainties and financial risk FDI in India has
increased by about 26% in the year [Link] value of FDI in the year 2014 is US $ 35 billion.
But unfortunately India slipped by one notch in the latest ranking of most favored destinations
for investment by Transnational Corporations leaving India in the fourth position.(UNCTADs
WIR,2014).
FDI in the Banking Sector in India
After the 1991 reforms in banking sector in India, the sector has developed a lot.
Indian Banks have technologically improved to international standards providing advanced
facilities like Internet Banking, M-Banking, ATMs etc, to its customers. Liberalization,
Privatization and Globalization has paved way for the entry of foreign banks into India and also
helped Indian Banks to enter and excel in world markets(Laghane,2007).Moreover, due to FDI
the banking sector has reaped certain benefits like transfer of technology, improved risk
management, financial stability and proper capitalization, integration into global economy,
transfer of knowledge and increasing [Link] helps in solving various problems in the
banking sector such as :
Lack of Financial Innovation.\
Problems related to inefficient management.
Non-Performing Assets (NPA).
Financial Instability.
Poor Capitalization and
Changes in Financial Market Conditions.
The very reason for the root cause of all these problems is low capital base.
Entire transactions happen in the banks without substantial capital base. In short, one can say that
FDI is a non-dent source of cash inflow which directly solves the problem of capital base
(Badade&Katkar , 2011).
Level of FDI in Indian Banking Sector
1)Private Sector: In 2005, India has liberalized FDI in banking sector by increasing the FDI limit
to 74% including investment by Foreign Institutional Investors(FII).It allows an aggregate
foreign investment of 74% of paid-up capital in a private bank.
2) Public Sector Banks: The Statutory limit for FDI and portfolio investment in nationalized
banks in 20%. It is also applicable to SBI and its associate banks. Government approval route is
the only way through which FDI is possible in public sector banks (DIPPFDI policy, 2014).
Inflow of FDI in Indian Banking Sector
Review of Literature:
Patil(2014) made an analysis on the performance of Indian Banks with FDI and
without FDI. To study the impact of FDI on performance of the banks she used the free
programmable software R. In the study it was found that the productivity of Indian banks had
increased in the FDI liberalized period. It was found that FDI had positive impact on Retune of
Asset (ROA) and total business of the banks and negative impact on the total net profits and
income of the banks. The study showed mixed results in overall performance of Banks with FDI.
Garg(2013) stated that several issues in banking sector such as encouraging
financial innovation, improvement of efficiency, adapting to changes in market condition can be
addressed by FDI in banking sector. She concluded that the banking sector has gone beyond
limits in growth and diversification all over the world. The author pinpoints that the banking
sector is fully globalised. In addition, the study states that FDI in banking sector also assured
better capitalization and financial stability.
Sabitha(2013) pointed that for a developing nation FDI is to be considered as
the lifeblood and driving force of economic development. Contribution to economic growth is
considered to be the important effect of FDI. In her study she pinpointed that there is a high
degree of positive correlation between FDI and economic development in India.
Kumar&Gupta(2012) stated that due to the belief that FDI can contribute to
economic development, many developing countries have changed their attitude towards FDI. In
the study it is said that due to progressive policy liberalization and fast paced economic growth,
India has become one of the attractive destination for Worlds investment.
Laghane(2011) empirically analyzed the impact of FDI model on borrower
account, bank branches, time deposits and profitability of domestic and foreign banks. The study
showed that LPG sponsored FDI model had a positive impact on profitability of foreign banks
and Indian banks. But FDI had a negative impact on Indian Banking Sector other than for
profitability.
Objectives of the study
1) To study the impact of FDI on productivity of select private sector banks in India.
2) To study the impact of FDI on profitability of select private sector banks in India.
Hypotheses
Main Hypotheses
HO1: There is no significant impact of FDI on productivity of select private sector banks in
India.
HO2: There is no significant impact of FDI on profitability of select private sector banks in
India.
Sub Hypotheses
HO1: There is no significant impact of FDI on Business per Employee (BPE) of select private
sector banks in India.
HO2: There is no significant impact of FDI on Profit per Employee (PPE) of select private
sector banks in India.
HO3: There is no significant impact of FDI on Total Net Profit of select private sector banks in
India.
HO4: There is no significant impact of FDI on Total Income of select private sector banks in
India.
HO5: There is no significant impact of FDI on Total Business of select private sector banks in
India.
Research Methodology
With a motive of achieving the study objectives and to analyze the different factors considered, a
methodology has been adopted. The study thus conducted is descriptive as well as analytical in
nature. So the study falls under both Descriptive as well as analytical research.
1) Banks selected for the study: Among the private sector banks, Kotak Mahindra Bank
Limited, IndusInd Bank Limited, Yes Bank Limited and ING Vysya Bank. For this study, Yes
Bank Limited and ING Vysya Bank have been selected.
2) Data Collection: Secondary data is the main source of data taken for analysis. The various
sources from which the data has been taken for analysis are Economic Survey of India, Annual
Publications of Ministry of Finance, Ministry of Commerce and Industry, RBI, Department of
Industrial Policy & Promotion Publications, Secretariat for Industrial Assistance (SIA)
newsletters, UNCTADs world investment reports and annual reports of select private sector
banks and so on.
3) Statistical Tool: In order to study the impact of FDI on performance and profitability of select
public sector banks, Multi Linear Regression analysis technique is used.